Question

If a debt with a credit card company is incurred, lets say Visa, and held unpaid until the expiration of the statute of limitations (6 years), what is the tax implication?

Suppose the debt was initially $10,000 in 2013, and is now $35,000 in 2019 when it expired.

If possible please relate it back to the IRC, Internal Revenue Code.

Answer 1

Answer:-

The statute of limitation give a time frame to the credit card companies/Creditors and debt collectors to sue debtor for credit card bill payment. If a debt collector/credit card company sues you to collect the time barred debt then you can have the case dismissed by intimating the court and letting the court know that the debt has become time barred. The clock to calculate the time barred period start from the day you last made the payment. The statute of limitation varies from state to state and the statue of limitation depends on the state where your bank holding your credit card debt is located.

Tax implication:-

According to IRS, Cancelled or forgiven debt are considered as income by the department and you must report the amount in the tax return in the year it was cancelled or forgiven and pay tax on it. Your credit card company will be issuing you 1099-C form with the cancellation amount and date and you need to show this as other income in form 1040. In the given example the debt amount is $35,000 so assuming the credit card company issues you 1099-C you need to report in tax return and pay tax on it failing which result in fines, penalties or even audit.

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